According to a survey conducted by the Central Bank of Kenya and the World Bank, more than 80% of buyers financed their home purchase, with an annual average growth of 34%.
If you fall into this category, keep reading as we discuss the benefits and drawbacks of paying for your home with a mortgage.
It’s not rocket science, but it’s also not simple; a number of factors must be considered, including current mortgage rates, the amount you need to finance, and your own unique financial situation.
Importantly, you should be aware that applying for a mortgage on any property, whether it is land or just an apartment unit, divides ownership into two: Debt is what the finance institution owns (ideally, what you own).
Mortgages are so advantageous because they enable you to invest in high-return properties. For example, if you take Ksh 5 million mortgages and purchase our Studio, 1 and 2 bedroom apartment units in Westlands, you will be able to sell it at Ksh 6.25 million in 30 months.
You will have made a whopping Ksh 1.25 million since you will be required to pay back what you owe and nothing more on the profits you’ve made.
Sounds lovely? This article looks at how mortgages are affecting buying real estate with a keen eye on how smart investors are using debt to make a fortune in real estate.
Mortgages are extremely beneficial because they allow you to invest in high-return properties. For example, if you borrow Ksh 5 million and buy our Studio, 1 and 2 bedroom apartment units in Westlands, you will be able to sell them for Ksh 6.25 million in 30 months.
You will have earned Ksh 1.25 million because you will be required to repay what you owe and nothing more.
Flow of Cash
Using the Kenzi Apartments in Westlands as an example, assuming Omondi Timon has Ksh 5 million in equity to invest and is torn between paying all cash for a Studio and financing a portion of Ksh 14 million on a 2 bedroom unit.
The larger property will be paid for with a Ksh 9 million loan with a 3% interest rate and a repayment period of 30 months Using a capitalization rate of 10%, this is how the properties will compare to one another.
| WITHOUT DEBT | WITH DEBT | |
| Property Value | 5,000,000 | 14,000,000 |
| Mortgage | 0 | 9,000,000 |
| Equity Investment | 5,000,000 | 5,000,000 |
| Net Income | 500,000 | 1,400,000 |
| Mortgage- Interest | 0 | 26,100 |
| Mortgage- Principal | 0 | 17,243 |
| Cash Flow | 500,000 | 1,356,657 |
| Cash on Cash Return | 10% | 27.13% |
Both properties in the example have a positive cash flow. However, the cash flow from the property with debt is Ksh 1,356,657, implying that Omondi’s cash on cash return increased from 10% to 27.13%.
Appreciation
Despite the fact that property values can fall on an annual basis, rental income skyrockets, particularly in Kenya’s capital, providing a strong net income. When compared to debt-free property, mortgaged property yields a higher return.
Total Profits
Assuming no change in annual net income, our example shows that Omondi’s earnings increased as a result of his use of mortgages. “Real estate investing, even on a very small scale,” says renowned businessman Robert Kiyosaki, “remains a tried and true means of building an individual’s cash flow and wealth.”
In conclusion
If you’re thinking about buying a home with a mortgage, you should look into interest rates using an online mortgage calculator.
Interest rate changes can have a significant impact on an investor’s ability to purchase any property.
This is due to the fact that as interest rates fall, the cost of obtaining a mortgage to purchase a home falls, resulting in a downward spiral, creating a greater demand for real estate, which pushes prices up.
One Response
Very Helpful post! Thank you